The best chance of peace would occur if: 1) Frum Jews become a majority in Israel; 2) The people in the Muslim world decide they are fed up with constant wars; 3) The Muslims form a large state including non-Arab Muslims.
If all three things happen, it would be possible for Israel to agree to be a member of that state in a way that makes the Palestinians feel they are no longer stateless (they would have a passport). If other countries in the state have armies, and few would give up their army, Israel could maintain a military. If there are multiple official languages (Farsi, Turkish, Urdu), having Hebrew would be less of a problem (and note that Hebrew speakers have an easier time learning Arabic than any other non-Arabs). Israel would have to offer that in matters where halacha and shariah agree, to make its laws conform to what the Muslims favor (e.g. no interest, no toeiva, etc.). Since a frum Jews is more interested in being able to live in Eretz Yisrael and do mitsvos, rather than building a workers’ paradise or a state “free” from the yoke of Torah, there is room.
It should be noted that at the end of World War I, the zionists and Arabs agreed to an autonomous zionist entity within a much large Arab state, and the the plan was thwarted by the British who feared such a state would be too powerful (consider an Arab state including all Arabs east of Suez, including Arabia, and including 15 million Jews (the current Israeli population plus six million).