Here is my experience with my two Series 3 watches:
I got the insufficient memory - delete stuff warning when trying to update.
Clicking on the ? in the dialog box took me to this support document which describes a special procedure for updating the series 3 - according to
https://support.apple.com/en-us/HT211283#unpair
you have to:
So after you unlink and relink the watch, and set it up as new, you then update - which worked, the two watches did update after a couple of tries. Note this is a lengthy process. Also note the watch is essentially new, you'll have to re-enter and re-bless your credit cards etc. in Wallet on the watch.
The problem I am having is that the only reason I updated the watches in the first place was to get iPhone unlock while wearing a mask, and for the life of me, I can only get the Watch app on my iPhone to accept one of the watches as eligible for granting the permission to use the watch as a password bypass.
The second watch, in that preference setting, remains grayed out and says it needs it software updated. But it is updated. Multiple restarts of all devices gets no joy.
MtD