Solution:
The reason they are asking you for an encryption key is for security (obviously)
Note: Even if you are not using the encrypted sessions, still you must set the encryption key in the config file which should be used to aid in preventing your session data manipulation. -
This modification will not break your code. But be very careful when updating it from 1.7.2 to 2.0.1. I suggest you must backup your code before updating it.
They have added a security improvement with a 2.0.0 version of the CI. I don't know why they did not talk about it in their upgrade guide though.
OR
If you use a Encryption class or a Session class then you MUST set the encryption key. Please see a user guide for info on it.
$config['encryption_key'] = '02527-269-2503946-70386-34730519';