Save, close, and open a new Terminal. Run “sudo -i”, and magically, you should get a prompt to press the button on your key! BOOM!
If that worked, then you should be able to reboot. When you get to the Lightdm login, it should prompt you to press the button on your device. Press it, and then click on the “Login” button.
W00t!!!! No more passwords required (with a password fallback if no device is connected)!
Disclaimer: This is not the BEST way to secure your machine, but it is a method that can make it convenient to use. If your key is stolen, it is possible that the key can be used to access your machine without your authorisation. Be wary!