Bhutan's Sovereign Wealth Fund experiences a surge in liquidity risk on Aave, with large stETH positions incurring unrealized losses

Bhutan’s National Sovereign Wealth Fund, Druk Holdings, is rapidly increasing its risk levels through large leveraged positions in the DeFi market. Following a temporary decline in Ethereum’s price, the fund’s main wallet operating on the Aave protocol saw its lending health ratio drop to a critical level below 1.2 in a short period. Although it has now recovered to 1.22, its vulnerability has become evident.

Critical Drop in Aave Lending Health Ratio and Risk Management Challenges

Druk Holdings and related addresses are employing a strategy of large leveraged long positions in Ethereum. As of the time of writing, these addresses hold 116,560 staked Ethereum (stETH), with an unrealized loss of about 10% from the purchase cost.

This unrealized loss directly reflects recent Ethereum price fluctuations. ETH is currently down to $1,970 (1.97K), and for a sovereign wealth fund leveraging high positions, such price volatility can trigger margin calls.

Concentration of stETH Positions and Dependence on Aave

Interestingly, all stETH held by Druk Holdings are concentrated within the Aave protocol. The main wallet alone holds 104,000 stETH and has lent out 200 million USDT, creating a complex leverage structure that increases the overall market risk of Bhutan’s sovereign wealth fund.

The interaction between stETH price fluctuations and Aave’s health ratio system means that even minor market movements could cascade into amplified risks. The large USDT lending indicates the fund is in need of additional liquidity, highlighting how tense the situation is in maintaining high leverage strategies.

Challenges of Large DeFi Leverage Strategies for Sovereign Wealth Funds

This high-risk strategy adopted by Bhutan’s sovereign wealth fund significantly exceeds traditional national asset management frameworks. Building large positions on DeFi protocols involves simultaneous exposure to liquidity risk, smart contract risk, and market risk.

The recent event of the health ratio falling illustrates that even sovereign funds cannot fully withstand sharp fluctuations in the DeFi market. Future movements in Ethereum’s price will largely determine the fund’s ability to maintain its positions.