diff --git a/.github/workflows/ci.yml b/.github/workflows/ci.yml
index 7fc1dd54..2911d35f 100644
--- a/.github/workflows/ci.yml
+++ b/.github/workflows/ci.yml
@@ -317,6 +317,36 @@ jobs:
       - name: Clippy
         run: cargo clippy --release --target x86_64-pc-windows-gnu --all-targets -- -D warnings
 
+  # ==========================================================================
+  # Windows native unit tests (real NTFS, not cross-compiled)
+  # ==========================================================================
+  # The cross job above only builds + lints; it cannot exercise filesystem
+  # behavior. Sparse-file expansion of the disk templates depends on NTFS
+  # semantics (a file is only sparse after FSCTL_SET_SPARSE), which a Linux
+  # cross-build silently gets wrong. This job runs the pack unit tests on a
+  # real Windows runner so that class of regression is caught in CI.
+  windows-native-test:
+    name: Windows (x86_64, native tests)
+    runs-on: windows-latest
+    steps:
+      - uses: actions/checkout@v6
+
+      - uses: dtolnay/rust-toolchain@stable
+
+      - name: Cache cargo
+        uses: actions/cache@v5
+        with:
+          path: |
+            ~/.cargo/registry/index/
+            ~/.cargo/registry/cache/
+            ~/.cargo/git/db/
+            target/
+          key: windows-msvc-cargo-${{ hashFiles('**/Cargo.lock', '**/Cargo.toml') }}
+          restore-keys: windows-msvc-cargo-
+
+      - name: Pack unit tests (native NTFS)
+        run: cargo test -p smolvm-pack --lib
+
   # ==========================================================================
   # Build agent (Linux musl for static binary)
   # ==========================================================================
diff --git a/crates/smolvm-pack/src/assets.rs b/crates/smolvm-pack/src/assets.rs
index a9cbd33d..c0906aa3 100644
--- a/crates/smolvm-pack/src/assets.rs
+++ b/crates/smolvm-pack/src/assets.rs
@@ -50,24 +50,152 @@ pub const ZSTD_LEVEL: i32 = 3;
 /// Searches in order:
 /// 1. `~/.smolvm/{filename}` (installed location)
 /// 2. Next to the current executable (development)
-fn find_existing_template(filename: &str) -> Option<PathBuf> {
+///
+/// Each location is checked for the plain file first and then for a `.zst`
+/// sibling, which is expanded on demand by [`materialize_template`]. Releases
+/// ship only the compressed form; the plain file is still honored so existing
+/// installs and development trees keep working untouched.
+pub fn find_existing_template(filename: &str) -> Option<PathBuf> {
+    let mut roots: Vec<PathBuf> = Vec::new();
     if let Some(home) = dirs::home_dir() {
-        let path = home.join(".smolvm").join(filename);
-        if path.exists() {
-            return Some(path);
-        }
+        roots.push(home.join(".smolvm"));
     }
     if let Ok(exe) = std::env::current_exe() {
         if let Some(dir) = exe.parent() {
-            let path = dir.join(filename);
-            if path.exists() {
-                return Some(path);
+            roots.push(dir.to_path_buf());
+        }
+    }
+
+    for root in &roots {
+        let plain = root.join(filename);
+        if plain.exists() {
+            return Some(plain);
+        }
+    }
+    for root in &roots {
+        let compressed = root.join(format!("{filename}.zst"));
+        if compressed.exists() {
+            match expand_template(&compressed, filename) {
+                Ok(path) => return Some(path),
+                Err(e) => {
+                    // Falling through would report the template as simply
+                    // missing, which hides the real cause (usually no space or
+                    // no writable location).
+                    eprintln!("warning: could not expand {}: {e}", compressed.display());
+                }
             }
         }
     }
     None
 }
 
+/// Expand `compressed` into a sparse file and return the expanded path.
+///
+/// Written next to the archive when that directory is writable, otherwise into
+/// the user cache — the read-only case is the normal one for Nix and any other
+/// immutable store. The result is reused on later runs: the plain-file lookup
+/// above finds it first, so expansion happens once per install.
+fn expand_template(compressed: &Path, filename: &str) -> std::io::Result<PathBuf> {
+    let beside = compressed.parent().map(|d| d.join(filename));
+    let cached = dirs::cache_dir().map(|c| c.join("smolvm").join(filename));
+
+    let mut last_err = None;
+    for dest in [beside, cached].into_iter().flatten() {
+        if dest.exists() {
+            return Ok(dest);
+        }
+        if let Some(parent) = dest.parent() {
+            if fs::create_dir_all(parent).is_err() {
+                continue;
+            }
+        }
+        match materialize_template(compressed, &dest) {
+            Ok(()) => return Ok(dest),
+            Err(e) => {
+                // A partial file would be mistaken for a good template by the
+                // plain-file lookup, so remove it before trying the next root.
+                let _ = fs::remove_file(&dest);
+                last_err = Some(e);
+            }
+        }
+    }
+    Err(last_err.unwrap_or_else(|| {
+        std::io::Error::other("no writable location to expand the disk template")
+    }))
+}
+
+/// Decompress `src` into `dest`, writing only the non-zero regions.
+///
+/// The template is ~20 GiB logical and a few MiB of real data. Expanding it
+/// with a plain copy would write every zero, so the zero runs are skipped and
+/// left as holes — the same shape the file has when built. Decompression goes
+/// to a temporary file that is renamed into place only on success, so a crash
+/// or a full disk cannot leave a truncated template behind for the next run to
+/// treat as valid.
+fn materialize_template(src: &Path, dest: &Path) -> std::io::Result<()> {
+    let tmp = dest.with_extension("partial");
+    let _ = fs::remove_file(&tmp);
+    let result = decompress_sparse(src, &tmp);
+    if result.is_ok() {
+        if let Err(e) = fs::rename(&tmp, dest) {
+            let _ = fs::remove_file(&tmp);
+            return Err(e);
+        }
+        return Ok(());
+    }
+    // Leave nothing behind on failure: a stray scratch file wastes space, and a
+    // renamed partial would be picked up as a valid template by the next run.
+    let _ = fs::remove_file(&tmp);
+    result
+}
+
+/// Stream `src` into `dest`, skipping the zero runs so they stay holes.
+fn decompress_sparse(src: &Path, dest: &Path) -> std::io::Result<()> {
+    use std::io::Read as _;
+
+    let file = File::create(dest)?;
+    // On Windows/NTFS, File::create makes a non-sparse file: seeking past the
+    // zero runs and set_len-ing to the full 20 GiB would allocate and zero-fill
+    // the whole gap, ballooning the template to its full logical size on disk.
+    // Mark it sparse first so only the written extents consume space — matching
+    // the implicit sparse behavior the seek/set_len path already gets on ext4
+    // and APFS.
+    #[cfg(windows)]
+    crate::extract::mark_file_sparse(&file)?;
+    let mut out = std::io::BufWriter::new(file);
+
+    let mut decoder = zstd::Decoder::new(File::open(src)?)?;
+    let mut buf = vec![0u8; 512 * 1024];
+    let mut offset: u64 = 0;
+    loop {
+        let mut filled = 0;
+        // Fill the whole buffer so the zero test sees full chunks rather than
+        // whatever short reads the decoder happens to produce.
+        while filled < buf.len() {
+            match decoder.read(&mut buf[filled..])? {
+                0 => break,
+                n => filled += n,
+            }
+        }
+        if filled == 0 {
+            break;
+        }
+        let chunk = &buf[..filled];
+        if chunk.iter().any(|&b| b != 0) {
+            out.seek(SeekFrom::Start(offset))?;
+            out.write_all(chunk)?;
+        }
+        offset += filled as u64;
+    }
+    out.flush()?;
+    let file = out.into_inner().map_err(|e| e.into_error())?;
+    // Trailing zeros are never written, so set the length explicitly to give the
+    // file its full logical size with the tail left as a hole.
+    file.set_len(offset)?;
+    file.sync_all()?;
+    Ok(())
+}
+
 /// Asset collector for gathering runtime components.
 pub struct AssetCollector {
     staging_dir: PathBuf,
@@ -928,3 +1056,170 @@ mod tests {
         assert_eq!(fs::read_to_string(&restored).unwrap(), "hello world");
     }
 }
+
+/// Expanding a compressed disk template back into a sparse file.
+#[cfg(test)]
+mod template_expand_tests {
+    use super::*;
+
+    /// Build a template-shaped file: a little real data, a large hole, a tail.
+    /// Sized at 64 MiB: APFS does not report holes for files much smaller than
+    /// this regardless of how they are written, so a smaller fixture would fail
+    /// the sparseness assertion even for a correct implementation.
+    fn template_bytes() -> Vec<u8> {
+        let mut v = vec![0u8; 64 * 1024 * 1024];
+        v[..4096].copy_from_slice(&[0xABu8; 4096]);
+        let tail = v.len() - 16;
+        v[tail..].copy_from_slice(&[0xCDu8; 16]);
+        v
+    }
+
+    fn compress_to(path: &Path, data: &[u8]) {
+        let out = File::create(path).expect("create zst");
+        let mut enc = zstd::Encoder::new(out, 3).expect("encoder");
+        enc.write_all(data).expect("write");
+        enc.finish().expect("finish");
+    }
+
+    #[test]
+    fn expansion_reproduces_the_original_bytes() {
+        let tmp = tempfile::tempdir().expect("tempdir");
+        let src = tmp.path().join("t.ext4.zst");
+        let dest = tmp.path().join("t.ext4");
+        let data = template_bytes();
+        compress_to(&src, &data);
+
+        materialize_template(&src, &dest).expect("materialize");
+
+        assert_eq!(fs::read(&dest).expect("read"), data);
+    }
+
+    /// The point of the exercise: the hole must not be written out.
+    #[cfg(unix)]
+    #[test]
+    fn the_hole_is_left_unallocated() {
+        use std::os::unix::fs::MetadataExt;
+        let tmp = tempfile::tempdir().expect("tempdir");
+        let src = tmp.path().join("t.ext4.zst");
+        let dest = tmp.path().join("t.ext4");
+        let data = template_bytes();
+        compress_to(&src, &data);
+
+        materialize_template(&src, &dest).expect("materialize");
+
+        let meta = fs::metadata(&dest).expect("stat");
+        assert_eq!(meta.len(), data.len() as u64, "logical size must match");
+        let dense = data.len() as u64 / 512;
+        assert!(
+            meta.blocks() < dense / 4,
+            "expected a sparse file, got {} blocks vs {dense} if dense",
+            meta.blocks()
+        );
+    }
+
+    /// The same guarantee on Windows/NTFS, where holes exist only after the file
+    /// is explicitly marked sparse — the plain seek/set_len path leaves it dense.
+    /// `GetCompressedFileSizeW` reports the bytes actually allocated on disk, so a
+    /// sparse expansion reads far below the logical size while a dense one matches
+    /// it. Cross-compilation cannot exercise this; it needs a native Windows run.
+    #[cfg(windows)]
+    #[test]
+    fn the_hole_is_left_unallocated() {
+        use std::os::windows::ffi::OsStrExt;
+        use windows_sys::Win32::Storage::FileSystem::GetCompressedFileSizeW;
+
+        let tmp = tempfile::tempdir().expect("tempdir");
+        let src = tmp.path().join("t.ext4.zst");
+        let dest = tmp.path().join("t.ext4");
+        let data = template_bytes();
+        compress_to(&src, &data);
+
+        materialize_template(&src, &dest).expect("materialize");
+
+        assert_eq!(
+            fs::metadata(&dest).expect("stat").len(),
+            data.len() as u64,
+            "logical size must match"
+        );
+
+        let wide: Vec<u16> = dest.as_os_str().encode_wide().chain([0]).collect();
+        let mut high: u32 = 0;
+        // SAFETY: `wide` is a valid NUL-terminated path; `high` is a valid out ptr.
+        let low = unsafe { GetCompressedFileSizeW(wide.as_ptr(), &mut high) };
+        assert_ne!(low, u32::MAX, "GetCompressedFileSizeW failed");
+        let on_disk = ((high as u64) << 32) | low as u64;
+        assert!(
+            on_disk < data.len() as u64 / 4,
+            "expected a sparse file, got {on_disk} bytes on disk vs {} logical",
+            data.len()
+        );
+    }
+
+    /// A file that is entirely zeros still has to come back at full length.
+    #[test]
+    fn an_all_zero_template_keeps_its_length() {
+        let tmp = tempfile::tempdir().expect("tempdir");
+        let src = tmp.path().join("z.ext4.zst");
+        let dest = tmp.path().join("z.ext4");
+        let data = vec![0u8; 4 * 1024 * 1024];
+        compress_to(&src, &data);
+
+        materialize_template(&src, &dest).expect("materialize");
+
+        assert_eq!(fs::metadata(&dest).expect("stat").len(), data.len() as u64);
+        assert!(fs::read(&dest).expect("read").iter().all(|&b| b == 0));
+    }
+
+    /// End-to-end discovery: a `.zst` beside the executable is found and
+    /// expanded, exercising the same `current_exe()` branch a real install uses.
+    /// The filename is unique so parallel tests cannot collide, and both the
+    /// archive and its expansion are removed afterwards.
+    #[test]
+    fn a_zst_beside_the_executable_is_discovered_and_expanded() {
+        let exe = std::env::current_exe().expect("current_exe");
+        let dir = exe.parent().expect("exe dir");
+        let name = format!("discovery-probe-{}.ext4", std::process::id());
+        let zst = dir.join(format!("{name}.zst"));
+        let expanded = dir.join(&name);
+        let _ = fs::remove_file(&zst);
+        let _ = fs::remove_file(&expanded);
+
+        let data = template_bytes();
+        compress_to(&zst, &data);
+
+        let found = find_existing_template(&name);
+
+        let cleanup = || {
+            let _ = fs::remove_file(&zst);
+            let _ = fs::remove_file(&expanded);
+        };
+        let Some(path) = found else {
+            cleanup();
+            panic!("compressed template beside the executable was not found");
+        };
+        let got = fs::read(&path).expect("read expanded");
+        cleanup();
+        assert_eq!(got, data, "expanded template must match the original");
+    }
+
+    /// A truncated archive must not leave a half-written file behind, or the
+    /// plain-file lookup would treat the debris as a valid template.
+    #[test]
+    fn a_corrupt_archive_leaves_no_partial_file() {
+        let tmp = tempfile::tempdir().expect("tempdir");
+        let src = tmp.path().join("bad.ext4.zst");
+        let dest = tmp.path().join("bad.ext4");
+        let data = template_bytes();
+        compress_to(&src, &data);
+        // Lop off the end so decompression fails partway.
+        let whole = fs::read(&src).expect("read zst");
+        fs::write(&src, &whole[..whole.len() / 2]).expect("truncate");
+
+        assert!(materialize_template(&src, &dest).is_err());
+        assert!(!dest.exists(), "no template should be left behind");
+        assert!(
+            !dest.with_extension("partial").exists(),
+            "no scratch file should be left behind"
+        );
+    }
+}
diff --git a/crates/smolvm-pack/src/extract.rs b/crates/smolvm-pack/src/extract.rs
index fbcc0639..6fa0b058 100644
--- a/crates/smolvm-pack/src/extract.rs
+++ b/crates/smolvm-pack/src/extract.rs
@@ -3272,6 +3272,9 @@ mod tests {
         assert!(!dest.join("unknown-type-entry").exists());
     }
 
+    // Sets directory mtimes via libc::utimes to drive the LRU ordering, so it
+    // only compiles on Unix; the eviction logic under test is platform-agnostic.
+    #[cfg(unix)]
     #[test]
     fn test_evict_cache_to_size_lru() {
         use std::ffi::CString;
@@ -3307,6 +3310,7 @@ mod tests {
         assert!(mid.exists() && new.exists(), "newer extractions kept");
     }
 
+    #[cfg(unix)]
     #[test]
     fn test_evict_cache_protects_current_extraction() {
         use std::ffi::CString;
diff --git a/lib/libkrun.dylib b/lib/libkrun.dylib
index a6c99aee..966bea65 100755
--- a/lib/libkrun.dylib
+++ b/lib/libkrun.dylib
@@ -1,3 +1,3 @@
 version https://git-lfs.github.com/spec/v1
-oid sha256:1114beddf44f10605af389cfb450dd2357bc98d92c4f6cf13dafec073721af43
+oid sha256:37b50c7dffc8161359190c2afc467b17fdda6a74031345b2b09a789b13f923ba
 size 6200288
diff --git a/scripts/build-dist-windows.sh b/scripts/build-dist-windows.sh
index 8dc1b99a..b2a4d608 100755
--- a/scripts/build-dist-windows.sh
+++ b/scripts/build-dist-windows.sh
@@ -101,7 +101,8 @@ echo "Agent rootfs tarball: $(du -h "$DIST_DIR/agent-rootfs.tar.gz" | cut -f1)"
 # per-machine copy to the requested virtual size itself (copy_disk_from_template
 # marks the copy sparse and set_lens it; the guest grows the ext4 with resize2fs
 # at boot), so nothing on Windows needs a pre-extended template. The Linux/macOS
-# tarballs keep full-size templates via GNU tar --sparse (see build-dist.sh).
+# tarballs keep full-size templates, shipped zstd-compressed and expanded back
+# to a sparse file on first use (see build-dist.sh).
 if command -v mkfs.ext4 >/dev/null 2>&1; then
     echo "Creating disk templates..."
     make_template() { # $1=path $2=label
diff --git a/scripts/build-dist.sh b/scripts/build-dist.sh
index f022335c..e7f9c5fd 100755
--- a/scripts/build-dist.sh
+++ b/scripts/build-dist.sh
@@ -555,6 +555,26 @@ else
     # Size to the default overlay virtual size (DEFAULT_OVERLAY_SIZE_GIB=10).
     extend_sparse "$OVERLAY_TEMPLATE_PATH" $((10 * 1024 * 1024 * 1024))
     echo "Overlay template created: $(du -h "$OVERLAY_TEMPLATE_PATH" | cut -f1) physical (10 GiB virtual)"
+
+    # Ship the templates compressed rather than sparse.
+    #
+    # A 20 GiB file holding a few MiB of real data only stays small where the
+    # filesystem understands holes, and that assumption breaks outside it: GNU
+    # tar cannot read the sparse encoding bsdtar writes (so `nix run` fails on
+    # the macOS tarball), and the Nix store materializes every zero, costing
+    # 30 GiB for the pair. Compressed, the same content is a few hundred KiB and
+    # is just an ordinary file to every tool in the chain. smolvm expands it
+    # back into a sparse file on first use.
+    if command -v zstd >/dev/null 2>&1; then
+        for tmpl in "$TEMPLATE_PATH" "$OVERLAY_TEMPLATE_PATH"; do
+            zstd -19 -T0 -q --rm -f "$tmpl" -o "${tmpl}.zst"
+            echo "  compressed $(basename "$tmpl") -> $(du -h "${tmpl}.zst" | cut -f1)"
+        done
+    else
+        echo "Warning: zstd not found; shipping uncompressed sparse templates."
+        echo "         These cannot be extracted by GNU tar from a macOS-built"
+        echo "         tarball, and consume their full virtual size under Nix."
+    fi
 fi
 
 # Copy README
diff --git a/src/storage.rs b/src/storage.rs
index edca1c0c..99bd00ce 100644
--- a/src/storage.rs
+++ b/src/storage.rs
@@ -465,37 +465,20 @@ impl<K: DiskType> VmDisk<K> {
 
     /// Find a pre-formatted disk template.
     ///
-    /// Searches in order:
-    /// 1. `~/.smolvm/{filename}` (installed location)
-    /// 2. Next to the current executable (development)
+    /// Searches `~/.smolvm/` then the executable's directory, accepting either
+    /// the plain file or a `.zst` archive that is expanded to a sparse file on
+    /// first use — releases ship the compressed form. Shared with the pack
+    /// crate so both paths agree on where templates live and how they expand.
     fn template_path() -> Option<PathBuf> {
-        if let Some(home) = dirs::home_dir() {
-            let installed_path = home.join(".smolvm").join(K::TEMPLATE_FILENAME);
-            if installed_path.exists() {
-                tracing::debug!(
-                    path = %installed_path.display(),
-                    disk_type = K::NAME,
-                    "found disk template"
-                );
-                return Some(installed_path);
-            }
-        }
-
-        if let Ok(exe_path) = std::env::current_exe() {
-            if let Some(exe_dir) = exe_path.parent() {
-                let dev_path = exe_dir.join(K::TEMPLATE_FILENAME);
-                if dev_path.exists() {
-                    tracing::debug!(
-                        path = %dev_path.display(),
-                        disk_type = K::NAME,
-                        "found disk template (dev)"
-                    );
-                    return Some(dev_path);
-                }
-            }
+        let found = smolvm_pack::assets::find_existing_template(K::TEMPLATE_FILENAME);
+        if let Some(path) = &found {
+            tracing::debug!(
+                path = %path.display(),
+                disk_type = K::NAME,
+                "found disk template"
+            );
         }
-
-        None
+        found
     }
 
     /// Get the path to the format marker file for a disk.