'Ustedes' is polite plural form of 'you'. 'Vosotros' is the normal plural form of 'you' but it's only used in Spain while in Latin America(and in the Canary islands) 'ustedes' is used for both polite and regular plural 'you' form.
Is "They see the sky" incorrect? I thought ustedes could be third-person plural as well as second-person plural to replace vosotros
No, Geoff. See acarbelaez's response above. Ustedes is plural "you", and you're right that on DL, instead of 'vosotros' (Plural of Tú = 'You [familiar] in Spain) we only use 'ustedes'. In other words, for Plural of both Usted and Tú we use "Ustedes".
I think Duo simply includes the "all" to highlight that it is the plural ustedes being used, rather than the singular usted, since there is no other context in the sentence. Including "all" is generally not required by Duo in responses, and to this point I have never been penalized for omitting it.