Hamas basic minimum demands: lift blockade, cease targeted assassinations.
Israel basic minimum demands: No change in status quo based on military threat. Hamas to cease rocket fire. Targeted assassinations will cease based on continued cease fire, but remain a legitimate tactic in the event Hamas can't/won't control rocket fire.
Both sides operate under a given set of economi contraints and political constraints. They have short term and longer term goals, and there are a bunch of third party players (including the actual PA authority). Both sides have lots of incentive to end the current fight, but neither wants to compromise what it sees as its gains as a consequence of the current struggle.
As I explain below, my feeling is that Israel needs to play for the long term here.
I would settle for an end to the blockade conditional on PA unification, with a quiet understanding that Hamas does not need to formally renounce its organizational goal of destroying the Zionist entity to participate in the new government. In exchange, Hamas would acknowledge that as part of a PA government it is bound by any agreements made by that government and will not conduct a separate foreign policy/policy of aggression. Unspoken, PA commitment under the existing interim agreements on weapons inspections for incoming shipments would resume under the PA, but conducted under joint PA and Israeli auspices rather than solely by Israel. (kinda the way Hezbollah currently participates in the Lebanese gov while maintaining a separate extra-governmental military). I'd also concede on targeted assassinations, contingent on formal declaration of renewed hostilities. (e.g., Israel would need to formally state that a state of hostilities has resumed and Hamas officials are now fair game.)
In the short term, this looks like a Hamas win achieved through superior firepower and will be credited in the Islamic world as such. It would also have severe political costs for Netanyahu. Bluntly, such a deal could easily cost him the election, as it would be perceived as a sign of weakness and a "reward" to Hamas for aggressive military action which would only embolden further military action.
But longer term, it does two things. First, it gets Israel out of its unsustainable blockade (which is pretty useless now that Egypt is not cooperating much). Second, and more importantly, it creates a single, unified PA which can form the basis for actual negotiations on some sort of permanent status (I won't say peace deal, that's out of the question).
Why? Part of this is because Israel still needs a change in long term strategy. Lets consider the following important lessons learned here from all sides.
1) For Hamas: Israel is not capable of keeping Hamas diplomatically isolated in the new Middle East. The current hostility has allowed Hamas to reaffirm control over Gaza and receive direct recognition as a legitimate government from Arab countries such as Egypt. That doesn't change even if Israel goes in and takes out Hamas' existing infrastructure.
2) For Israel: The Arab world loves Palestinians and hates Israel, but they have absolutely zero interest in dying for Palestinians by fighting Israel. Egypt, Hezbollah, and Syria have all stayed on the sidelines militarily. Also, official response from industrialized nations is fairly muted. Canada and UK have conservative governments that are generally more pro-Israel and anti-Hamas. The U.S. policy is still pro-Israel and anti-Hamas. France and other EU nations have been less critical of Israel than they were post-2002, largely because they have their own issues and are a lot less happy with their own moslem populations. As long as Israel avoids a ground offensive and sticks to its existing missile campaign, it now appears unlikely to suffer significant diplomatic repercussions. So, from Hamas' perspective, there is a clear limit to how much it can hope to achieve militarily. Plus, if Hamas actually did penetrate Iron Dome and score major hit on Tel Aviv or Jerusalem, it would sacrifice major propaganda weapon in non-Arab states.
3) For Israel: Defensive capability stronger than anticipated. Also clear that they would totally wipe the crap out of Hamas in ground invasion. If direct hit actually did significant damage to Tel Aviv or J'lem, Israel would go bug-fuck crazy and Hamas knows it.
4) For Hamas: No matter how you slice it, Israel cannot win a ground invasion as a political matter unless Hamas scored a massive missile hit on an Israeli population center generating hundreds of civilian casualties. Even then, would probably be worse off after a ground invasion. Sorry that this sucks, but that's how it goes. Also, ground invasion might tip the balance with neighboring powers and bring Lebanon, Syria and Egypt into the action.
5) For Hamas: this is extremely expensive and therefore ultimately unsustainable for Israel. Even without the direct cost of operating Iron Dome and the damage caused by actual missile strikes, the overall cost to the economy in lost productivity and the disruption of calling up the reserves is pretty severe. Also, human suffering (on both sides) a big negative.
6) For Israel: Hamas has similar economic constraints, if less severe. Their weapons are cheaper, and one advantage of a crappy economy is that lost productivity does not hurt you nearly as bad. But the overall infrastructure cost makes replacement expensive. Also, mythology to the contrary, vast majority of Palestinians in Gaza do not particularly want to die and would like to go back to actual lives.
Longer term, it is clear after this that Hamas is not going away. They have institutionalized and have significant diplomatic support. between '09-'12, support shifted to Fatah, which was making measurable progress on quality of life issues for residents of the West Bank and seemed to be on track for recognition as a sovereign state. Palestinians, especially in the under 25 demographic, supported reunification of Hamas and PA. Hamas, for its part, found itself between trying to be a government in Gaza while still being the dominant "Resistance" faction (as opposed to Islamic Jihad or PFLP). Fatah drive for improvements and recognition as sovereign state stalled out in '12. Current crisis has shifted PA population sympathies back to Hamas as the guys who are at least *doing* something. Abbas, by contrast, seems weak and ineffective.
My approach therefore plays to the longer term. The best way to dilute Hamas' political gains and its institutional build up is to saddle them with Fatah. it is also the case from Israel's perspective that dealing with one government is a heck of a lot easier than dealing with two. While Fatah might ultimately attain political majority, Fatah will remain important political counterweight.
Also of significance, Hamas has demonstrated that it can and will govern and that it is capable of making rational decisions on when to use violence. It is not all suicide bombers all the time. Sure, Hamas is dedicated to the total destruction of Israel. So is Syria -- but it became possible to cut a deal with them to end wars in '49, '67 and '73. Meanwhile, a Fatah government that actually spoke for Gaza could engage in joint security operations in Gaza as it has in the West Bank. Hamas would maintain its own military, but such combined operation would help halt "unauthorized military resistance" from other PA groups.
It's kind of sucky to come up with what amounts to a diplomatic defeat when you are actually winning the short-term military conflict. But the alternatives for Israel are all pretty crappy. Given the economic issues, Hamas can keep waiting Israel out. At the same time, it is important not to underweight the Hamas concessions. Hamas would be reduced from political masters of Gaza to coalition partner with Fatah. While not technically renouncing its goal of destroying Israel, it would need to "collaborate" as part of the government and thus legitimize the non-military resistance strategy. They would be the heroes of the hour, but would be expected to cede significant independent military and political authority to a government which they know does not share its short-term objectives.