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I know that domain extensions are registered through corporations like IANA, but what physically stops anybody with the technical know how simply making their own .whatever extension? I have little knowledge of networking and DNS, but why can’t someone just set up their own server and host whatever they like?
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Any established public or private organization anywhere in the world can apply to create and operate a new generic Top-Level Domain (gTLD) registry. Applicants will need to demonstrate the operational, technical and financial capability to run a registry and comply with additional specific requirements.
A list of the top-level domains by the Internet Assigned Numbers Authority (IANA) is maintained at the Root Zone Database. IANA also oversees the approval process for new proposed top-level domains for ICANN. As of April 2021, their root domain contains 1502 top-level domains.
Depending on your company's field, it might not be possible to choose just any TLD. TLDs are reserved by the nonprofit organization Internet Corporation for Assigned Names and Numbers (ICANN). Any company that sells and maintains top-level domains must deal directly with ICANN.
The Internet Corporation for Assigned Names and Numbers (ICANN), is the entity that coordinates domains and IP addresses for the internet.
Well, "nothing" when it comes to your own machine or your own local LAN. You can host your machines with whatever domain names and extensions you like with your own DNS server running on your own network.
Things change when you want to have your machines accessible over the Internet with the domain names and extensions of your choice. WHY? Because, every domain extension (like .com, .net etc.) has to have a ROOT DNS server (aka root zone) managed by IANA with the help of ICANN and the root zone maintainer which is Verisign currently.
Why is the ROOT DNS important? Suppose, you want to have your custom domain extension as .day. Now if I enter http://warren.day in my browser to reach your web server (and let's assume this is the first time anyone from my part of the world has tried to access your web site) my ISP's DNS server would fail to resolve the domain from their cache.
My ISP's DNS server's next step would be then to contact the ROOT DNS server for .day (note that I have simplified the process and the servers could just be escalating the request to other DNS servers but it would finally reach the root zone indirectly) which wouldn't be present since you haven't had them set it up yet and like someone posted in their answer it would require a ton of cash or should serve some valid purpose.
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