Update last night, no sleep and sensor only has two LEDs lit up.

Well, my watch just force updated with a small update as well, I was already on 12.70 before and after the update I am also still on 12.70, so I hope I don't have any issues.  

Edit:  everything seems to have worked fine for me.

Post this update, I got no sleep tracked :( hope it works for you ! 

Any idea what the small update was ? 

i used to have the same issue with sleep tracking

just restart the Watch and it will work again.

If you are interested in additional information to small updates, you can open garmin express upfront. 

By chance, I did this yesterday and these were 17 (or so) minor, probably language updates. They were labeled as DB, ASR model.

So these should have nothing to do with sleep tracking, to my understanding.

In case of my watch also only 2 LEDs work instead of all

It´s the same with my watch (12.70 Update, minor follow up update; i was never on the BETA program). Maybe only 2 LEDs are working wenn the watch is not on your writst? Maybe it´s a standard?

But how does it know it's on the wrist or not? When you take the watch off the LEDs don't work at all, in order to take this photo I had to cheat it and cover the sensor with my hand 

2 LED's are always used during day to day low intensity readings. When just wearing the watch and not active, it'll use 2 LED's, as the heart rate is easier to pick up with less movement and jostling.

6 LED's are used during activities, and when the sensor is struggling to pick up on heart rate for some reason. It may also use the 6 LED's solid, rather than flashing, if struggling to pick up  a heart rate.