On January 30, 2026, the on-chain position of Druk Holdings, the sovereign wealth fund of Bhutan, associated with high leverage long positions in ETH on Aave, was prominently exposed, attracting global market attention. On-chain data shows that the related address holds approximately 116,560 stETH as collateral, with the loan health factor fluctuating in a narrow range of 1.15-1.22 over the long term, and the overall portfolio is currently in a state of about 10%-15% unrealized loss. The reality of the health factor approaching the 1.1 liquidation threshold puts this sovereign fund's high-leverage bet under scrutiny, raising concerns that if the market continues to decline or if the collateral experiences abnormal volatility, the sovereign fund could face not only significant paper losses but also a "nowhere to hide" forced liquidation test on the public chain.
The Identity Contrast of Sovereign Funds Betting on ETH On-Chain
● Subject Identity and Fund Attributes: Druk Holdings is Bhutan's sovereign wealth fund, nominally representing the state in asset allocation, with funding that has clear public and strategic attributes. Its traditional role is usually seen as a long-term, stable, low-volatility "national treasury." Because of this, when this sovereign fund is directly exposed to high-volatility on-chain leveraged positions in the name of the state, there is heightened scrutiny regarding its decision-making framework, risk tolerance, and impact on domestic public interests.
● Operational Path and Leverage Structure: From on-chain behavior, the Druk-associated address continuously borrows assets in the protocol by depositing stETH into Aave as collateral, then flows back to buy ETH or related exposures, effectively layering leverage on stETH returns within the protocol to construct a structural position amplifying ETH longs. Since both collateral and borrowing occur within a public DeFi protocol, this "typical on-chain leverage cycle" is fully exposed in on-chain data, providing the market with an unprecedented sample of sovereign fund DeFi operations.
● First Large-Scale Sovereign Leverage Exposure: Some market views assert, "This is the first time we have observed a sovereign wealth fund exposed to such large-scale leverage risk in a DeFi protocol." This assessment highlights the event's significance: in previous understandings, even when sovereign funds ventured into crypto assets, they were mostly low-frequency, low-leverage, and relatively closed arrangements. Now, however, there is a national-level fund publicly layering leverage on open protocols like Aave, breaking the traditional perception that "sovereign funds only make conservative allocations."
● Strong Contrast with Conservative Image: Traditional sovereign funds resemble "super-sized pensions," preferring predictable return assets like government bonds, blue-chip stocks, and infrastructure. In contrast, Bhutan's active leverage bet on ETH through Druk is more akin to a strategic gamble on high Beta assets. This shift from a "defensive treasury" to a "high-frequency on-chain trader" role has sparked widespread controversy: on one hand, it is seen as a pioneering experiment of sovereign funds embracing a new financial paradigm; on the other hand, it is questioned whether it deviates from the risk discipline that public assets should maintain.
The Liquidation Cliff of Health Factor Approaching 1.1
● Meaning of Health Factor and Technical Red Line: In lending protocols like Aave, the Health Factor is the core indicator measuring the safety of collateral positions; the higher the value, the more sufficient the collateral relative to the loan. When the health factor falls below 1, the protocol will automatically trigger liquidation, selling part or all of the collateral assets to repay the loan. In market practice, the area around 1.1 is seen as a "cliff zone" where liquidation risk sharply increases, as moderate price fluctuations can push the health factor below 1 in a very short time.
● Squeezed Safety Margin: Currently, the health factor of the Druk-associated address hovers in the 1.15-1.22 range, seemingly with some buffer, but combined with about 10%-15% unrealized loss, it means the original profit cushion has been eroded, and the position is forced to operate under a low safety margin. In this state, any further decline will amplify the sensitivity of the health factor, quickly consuming the already limited buffer space, effectively placing it in a "technical half-brake, half-accelerate" danger zone.
● Psychological Pressure of Market Warning Lines: Some institutions warn, "When the health factor is below 1.2, the market usually begins to alert to liquidation risks." This is a threshold with both technical and emotional implications: on one hand, it indicates that the objective safety margin is thin; on the other hand, it can trigger early reactions from counterparties, liquidators, and other institutional investors. In a public chain environment, such warnings often spread rapidly through social media and data panels, further intensifying the "liquidation narrative" surrounding the address, creating a negative feedback loop of public opinion and market behavior.
● Dual Asset Risks of stETH and ETH: More concerning is that the health factor of Druk is influenced not only by the ETH market price but also highly correlated with the price anchoring degree of stETH to ETH. If ETH weakens significantly again, the health factor will come under direct pressure; if stETH and ETH decouple at that time, it means the nominal value of the collateral assets will shrink simultaneously, and the dual blow could instantly push the health factor from the 1.15-1.2 range towards 1, with liquidation pressure amplifying non-linearly, forming a "price + discount" dual-factor stampede.
The Hidden Risks of stETH Collateral and Systemic Weaknesses
● Historical Decoupling and DeFi Impact: As a staking certificate for Ethereum, stETH should theoretically be close to a 1:1 peg to ETH, but historically, there have been multiple instances of relative discounts to ETH and even significant decoupling scenarios, each causing substantial impacts on the DeFi system. During discount periods, holders face dual pressures of market value shrinkage and staking returns not keeping up with price declines, while lending protocols using stETH as collateral are more prone to rapid health factor collapse and concentrated liquidations, triggering on-chain liquidity squeezes.
● The Temptation and Risks of Yield-Stacking Leverage: stETH inherently carries staking yields, and when layered with leverage in Aave as collateral, it can achieve a dual yield structure of "holding yields + leveraged amplification" from an accounting design perspective. This "easy profit + doubling" structure is highly attractive to fund managers, but it also means that when the market reverses, the original yield flow may not be sufficient to cover the amplified price volatility, creating an asymmetric risk of "limited upside, unlimited downside," especially with large sovereign funds involved, where any risk control misstep could escalate into a systemic event.
● Amplification Effect of Large Positions: With the Druk-associated address holding approximately 116,560 stETH, any passive adjustment or liquidation will directly impact the market liquidity and price of stETH. Large sell pressure will not only push down the price of stETH relative to ETH but may also trigger other holders to follow suit in reducing their positions and shaking confidence in the peg, causing risks that were originally confined to individual addresses to spread as a volatility amplifier across the entire stETH ecosystem, further transmitting to other DeFi protocols that use stETH as core collateral.
● Vulnerability of Collateral Under Emotional Reversal: In times of good market sentiment and ample liquidity, the "shadow risk" of stETH as collateral is often masked by yield stories; however, once macro sentiment deteriorates or liquidity tightens, the trading depth of stETH can quickly thin out, and the discount may widen in a short time, weakening its collateral value. For heavily leveraged positions relying on stETH collateral, this vulnerability means they are not only victims of price declines but also potential triggers and accelerators of future on-chain liquidity crises.
Three Approaches of Sovereign Funds: Bhutan's Aggressive Example
● Two More Traditional Sovereign Paths: In the practice of sovereign funds participating in the crypto market, there are already two relatively stable paths: one is similar to El Salvador, where the national level directly holds assets like BTC in the treasury's balance sheet, with positions mostly locked in for the long term; the other is akin to the Norwegian Sovereign Fund, which indirectly holds crypto-related exposures through compliant custodians and publicly traded company equities, managing risks within a traditional financial framework. In both models, position information is relatively concentrated, with infrequent leverage usage, and the transparency and regulatory systems are relatively mature.
● Bhutan's Model: The Most Aggressive and Transparent: In contrast, Bhutan's approach through Druk, actively managing and layering leverage on-chain, is clearly at the most aggressive end of the sovereign play spectrum. It exposes national funds directly to DeFi protocols, on-chain leverage, and real-time liquidation mechanisms, which, while providing unprecedented transparency—allowing anyone to observe position changes in real-time—also subjects it to extremely high public and market sensitivity. Once it approaches the liquidation edge, it becomes the center of a global spotlight storm.
● Compliance Audit and Information Disclosure Pressure: When sovereign funds choose to go on-chain and engage in high-frequency operations, traditional annual reports, delayed disclosures, and closed risk control models struggle to match the pace of second-level fluctuations and real-time liquidations of on-chain assets. This means Druk must face new pressures in compliance audits, internal accountability, and information disclosure to the public and parliament: how to explain the public leverage strategy to regulators? How to measure risk when there are significant paper fluctuations but no realized losses? These questions are far more complex than traditional government bond and stock investments.
● Long-Term Judgment Reflected Behind: On a deeper level, this aggressive on-chain layout reflects Bhutan's strong bet on the long-term prospects of crypto assets, especially the Ethereum ecosystem. Choosing to build leverage through stETH and Aave somewhat reflects a belief in the continued growth of staking economics and DeFi infrastructure. However, this decision to "bet national credit on new financial infrastructure" also transforms the future uncertainties of ETH and DeFi into a public-level political and fiscal risk, boldly redefining the asset management philosophy of a small country's sovereign assets.
The Multi-Line Game of Leveraged Liquidation or Soft Landing
● Passive Liquidation Path When ETH Continues to Decline: If the price of ETH continues to decline without actively adjusting positions, the health factor of the Druk-associated address will further approach 1. Once it falls below, Aave's liquidation mechanism will automatically trigger, selling the stETH collateral at a certain discount to liquidators to repay the loan. This process does not rely on human decision-making and is entirely driven by smart contracts, meaning that even a sovereign fund cannot "stop" after a technical trigger; it can only accept passive liquidation and potential significant slippage losses afterward.
● Impact Chain of Large Liquidations on Protocols and Markets: When a collateral position of approximately 116,560 stETH is concentrated for liquidation, it will have a chain impact on the stability of the Aave protocol, the market liquidity of stETH, and the spot price of ETH. On one hand, liquidation will sharply amplify the selling pressure on stETH, potentially leading to an expanded discount and triggering further chain reactions of liquidations; on the other hand, the panic sentiment surrounding the liquidation event will spill over into the broader ETH market, prompting some leveraged longs to proactively de-risk, amplifying short-term volatility and testing DeFi's capacity as a "ruthless automatic risk control system."
● Possible Self-Rescue Options for Sovereign Funds: Before truly hitting on-chain liquidation, Druk theoretically still has multiple strategies to choose from: first, to supplement the position with more collateral to improve the health factor, gaining time and space; second, to actively reduce leverage and partially repay loans, using reduced exposure to mitigate systemic risk; third, to hedge against ETH price declines through over-the-counter hedging or derivatives, balancing on-chain losses from off-chain. However, each option involves internal decision-making processes, a reassessment of risk tolerance, and a re-explanation of external public opinion, making it anything but a simple technical operation.
● The Wait-and-See Effect of Other Sovereign Funds and Institutions: Regardless of whether the final outcome is a "successful soft landing" or "passive liquidation on-chain," other sovereign funds and large institutions will view this event as an expensive public lesson. If Druk can maintain the health factor amid high volatility and achieve position repair, it may encourage some aggressive institutions to attempt to replicate the "sovereign DeFi strategy"; conversely, if a scenario arises where national funds are ruthlessly liquidated by smart contracts, more traditional institutions and sovereign funds may turn to more conservative paths, reinforcing their wariness of leverage and public DeFi, thereby altering the entire crypto market's risk pricing regarding "sovereign funds entering the market."
An Experiment on the Boundaries of Sovereign Funds and DeFi
● The Risk and Opportunity Window is Completely Torn Open: The event of Bhutan's sovereign wealth fund making a high-leverage bet on ETH on Aave has unprecedentedly laid bare the risks and opportunities of sovereign funds participating in DeFi. Previously, the imagination of "sovereign + crypto" was more confined to symbolic holdings and policy signals, but this time, the on-chain real-time exposure of health factors, unrealized losses, and liquidation pressures constitutes a public stress test on whether national-level funds can withstand the logic of decentralized risk control.
● Impact on Pricing and Expectations for Sovereign Funds: The direction of this experiment will profoundly affect the market's overall expectations for sovereign funds entering the crypto market. If Druk ultimately stabilizes and mitigates leverage risks, the market may raise the pricing for sovereign funds' "ability to handle more complex DeFi strategies," granting them a higher participation weight; conversely, if the event concludes with large-scale liquidations, the voice and image of sovereign funds in the crypto world may be dominated by caution and skepticism for a considerable time, and the pace of fund entry will be rewritten as a result.
● New Boundaries for Future Regulatory Consensus: From a regulatory and policy perspective, this event will undoubtedly prompt countries to re-examine the investment boundaries, disclosure obligations, and leverage usage norms for sovereign funds participating in the crypto market. Regulators may require sovereign funds to adhere to stricter risk budgeting and reporting mechanisms when using leverage on public chains, and even set concentration limits on single protocols and single assets to avoid exposing public assets to excessive risks in uncontrollable liquidation mechanisms.
● Key On-Chain Indicators Worth Continuous Tracking: For market participants, the Bhutan event is not just a "gossip hotspot," but a dynamic sample for observing the interaction logic between sovereign funds and DeFi. In the coming period, changes in the health factor of the address on Aave, as well as the discount or premium levels between stETH and ETH, will become key indicators for judging whether risks are easing or escalating. In this ongoing experiment, the on-chain data itself serves as the most authentic market and narrative carrier.
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