What a nightmare.
I got this message, but the system seemed to crash at some point after clicking update and it wouldn't ever get past this. I tried the following to no avail:
- Wiping the drive
- Connecting via ethernet instead
- Using a dedicated USB-C drive instead of going through a dongle
- Reinstalling the original OS so I could run the Big Sur installer from there instead (High Sierra would install fine but Big Sur would continue to give the "software update is required" message upon reboot)
- Resetting SMC, PRAM, etc
I ended up discovering that I could revive/restore the Apple T2 firmware as well using a second mac "host". This is done using the Configurator 2 app on the host computer connected to the problem computer using a USB-C cable connected to a specific USB port. Boot the problem computer into "DFU Mode" by doing their convoluted key combo sequence during boot, and then after selecting the DFU machine in Configurator, you can choose
Actions - >
Restore to begin the process.
I know it's frowned upon to include links without details, but booting into DFU mode is different depending on which mac you have. Here's a link to the article I used that shows them all: https://mrmacintosh.com/how-to-restore-bridgeos-on-a-t2-mac-how-to-put-a-mac-into-dfu-mode/
Here's a link to an Apple support article for specifically a 2018 Macbook Pro: https://help.apple.com/configurator/mac/2.7.1/#/apd0020c3dc2
Once you've done that you can now try to install Big Sur. Since your install media is undoubtedly on an external drive, you'll be told that booting from an external drive is not allowed. If you try to disable it from the Startup Security Utility, you might get a "no administrator was found" error, which means you can't actually allow booting from an external drive. To get past this, I ended up using Disk Utility to "restore" my SSD using my external installer's image. Voila, your installer is no longer an "external drive". I then added a partition to that drive (APFS) so that my installer partition would have something to install to.
Remove your external media (don't need it anymore), and hold down option on the next reboot so you can choose your installer partition. No more "software update is required" message!! Boom!
It's a long and convoluted process, but it worked for me. Hope this helps someone.