Bhutan is derived from the Sanskrit term Bhotanta which means the end of Bhota (Tibet) and some still say it derived from Sanskrit word Bhu-Uttan, Bhu-Land and Uttan-elevated.
But there are a lot of names given to Bhutan before it was officially known as Bhutan to the Outside world. At first, it was known as Mon: The land of darkness (Spiritual Darkness) as there was no religion as such. It was also known as Lhomon Khazhi: Southern Land of 4 approaches; Dungsamkha in East, Pasakha in South, Dalingkha in West, and Taktsherkha in North. Later it was also known as Menjong: The land of Medicinal Herbs.
Bhutan is popularly known as Drukyul-The Land Of Thunder Dragon. Its because, Tsangpa Gyarey (1161-1211) the renowned meditation master, ancestor of the founding father of Bhutan (Zhanbdrug Ngawang Namgyel) Nam area in Tibet following the prophecy of his teacher and Turtelary diety to set up a spiritual center, where it's said he have seen Dragons, that flew off as he approached. He took this as auspicious and from there name Dragon (Druk) and his tradition started to spread out to other places. And it includes Bhutan too. So we say Land as Drukyul, people as Drukpa, and Region we follow is Drukpa Kagyu.
Bon was sort of religion which came from Tibet before Buddhism was introduced and itt co-exist with Buddhism to some extend. Bon is basically believing in Mountain Gods, Water Spirits, and Forest Gurdian to which people do some rituals as thanksgiving.
But with visiting of Guru Padmasambhava in 8th century to Bhutan, he introduced Buddhism to Bhutan followed by a lot of Tibetan saints and masters visiting Bhutan and flourishing Buddhism.
The country was first unified in 17th century by Zhabdrung Ngawang Namgyel. After arriving in Bhutan from Tibet he consolidated his power, defeated three Tibetan invasions and established a comprehensive system of law and governance. His system of rule eroded after his death and the country fell into in-fighting and civil war between the various local rulers. This continued until the Trongsa Penlop Ugyen Wangchuck was able to gain control and with the support of the people to establish himself as Bhutan’s first hereditary King in 1907. His Majesty Ugyen Wangchuck became the first Druk Gyalpo (Dragon King) and set up the Wangchuck Dynasty that still rules today.
In 2008 Bhutan enacted its Constitution and converted to a democracy in order to better safeguard the rights of its citizens. Later in November of the same year, the currently reigning 5th Druk Gyalpo Jigme Khesar Namgyel Wangchuck was crowned.