Apple Watch Series 3 Owners Now Required to Perform Restore When Updating Due to Storage Constraints
Following the iOS 14.6 and watchOS 7.5 updates, Apple Watch Series 3 owners who update their devices to a new version of watchOS are prompted to unpair and re-pair the Apple Watch from the iPhone during the update process because of storage space constraints.

The GPS-only version of the Apple Watch Series 3 only has 8GB of internal storage, which limits the amount of space available for software updates, and Apple's solution to this problem is to wipe the Apple Watch Series 3 and start fresh from a backup whenever an update is required.
As 9to5Mac points out, prior to the iOS 14.6 update, Apple Watch Series 3 owners who attempted to install new versions of watchOS continually ran into an issue with not having enough storage space to download and install new software.
Rather than requiring users to clear apps and media from their Apple Watches, iOS 14.6 prompts users to go through the extra step of unpairing and re-pairing. "To install the watchOS update, unpair your Apple Watch and pair it again in the Apple Watch app on your iPhone," reads the notification that Apple Watch Series 3 owners receive. The popup is depicted below, but shown in Portuguese.
It's worth noting that prior to this update, Apple
did recommend unpairing and re-pairing for Apple Watch Series 3 owners experiencing issues, but now it appears to be part of the installation process.
Given the age of the Apple Watch Series 3, the limited storage space, and the extra step to install new software, it's likely that Apple is planning to discontinue the Apple Watch Series 3, likely when new Apple Watch models are released later this year. Apple is at the current time still selling it as a low-cost option, but we do not recommend purchasing it over a Series 6 or an Apple Watch SE, both of which feature much newer technology.
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