Because it only has 8 GB of storage there's basically never enough extra room on the watch to install new updates, so you legitimately have to wipe the watch and reinstall as new if you want to update it:
If you have Apple Watch Series 3, skip directly to the steps to unpair and update your Apple Watch.
Unpair and update your Apple Watch
1. Keep your Apple Watch and iPhone close together as you unpair them. 2. Open the Watch app on your iPhone. 3. Go to the My Watch tab and tap your watch at the top of the screen. 4. Tap the info button the info icon next to the watch that you want to unpair. 5. Tap Unpair Apple Watch. 6. For GPS + Cellular models, choose to keep your cellular plan. 7. Tap again to confirm. You might need to enter your Apple ID password to disable Activation Lock. Before erasing all content and settings on your Apple Watch, your iPhone creates a new backup of your Apple Watch. You can use the backup to restore a new Apple Watch.
Next, set up your Apple Watch with your iPhone. When asked whether you want to set up as new or restore from a backup, choose to set up as new. Then follow the onscreen instructions to finish setup. If you want to update to the watchOS beta, reinstall the beta profile after setup is complete.