That is a mess up, due to a check in the code that was not triggered during testing.
The update is in a transition state that was designed to be smoother, but ultimately got a bit messy if you are not already on 2.0.8.1.
I can see that this is a bit confusing, but as @ts678 mentions, this only happens because you do not have a password set, and this is now required. The dialog was designed for new installations, but pops up on upgrades, so perhaps the wording should have been a bit clearer.
Hope you get it working despite the trouble.
Sadly no
The manifest serves both the users of 2.0.8.1 (for whom it is working) and older installs where it does not work. At this point I only have the option of breaking 2.0.8.1 upgrade notices or the current state. At least in the current state you are alerted that there is an upgrade.