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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Nothing. Get your own DNS infrastructure and set it up. Other people probably won't be able to access it, though. – Esoteric Screen Name May 10 '13 at 13:56
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Like Esoteric Screen Name said, nothing is stopping you aside from not having a wide adoption rate. There are a few pseudo TLDs that are floating around right now. http://en.wikipedia.org/wiki/.onion – Trenton Trama May 10 '13 at 13:58
7 Answers
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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2@umeboshi Good luck asking the rest of the 99.99% of Internet users to change their DNS. – Ravi K Thapliyal Nov 15 '15 at 10:23
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1@umeboshi it's not misleading at all (although if anything it's too simplified). The so-called "alternate roots" have no prospect of ever being useful within the global DNS as we currently know it. – Alnitak Aug 09 '16 at 09:23
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TIL Ricoh has their own TLD. How did they do it? Tons of $$$s? You can find Ricoh here: http://data.iana.org/TLD/tlds-alpha-by-domain.txt – Sam Sirry Jun 18 '17 at 09:52
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@SamSirry the list of TLDs is not a static one over the years. In 2012 ICANN started a process to add new gTLDs in the root, ~1900 applicants asked for either open gTLDs or closed one (for brands). Ricoh just followed this process; like others. – Patrick Mevzek Jul 22 '18 at 02:27
On the contrary, most people are wrong here... country code domains such as the .ws domain is operated WITHOUT ICANN authority, regulation or oversight and they work worldwide... so this question still remains... how to go AROUND ICANN and create your own TLD without ICANN permission or regulation?
.WS is a country code domain so it does not fall under the authority of ICANN. WebSite.WS is the Registry for the .WS domain, and operates under a long term contract with the island of (Western) Samoa.
source: https://www.website.ws/faq

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You can't do it. Nation states have the right to a ccTLD within the root zone, but everyone else has to go through ICANN. – Alnitak Aug 09 '16 at 09:22
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1No, you are wrong. IANA manages the root zone that handles both gTLDs and ccTLDs. gTLDs are under contract with ICANN. ccTLDs were grandfathered and some of them did sign letters of mutual understanding; see https://www.icann.org/resources/pages/cctlds/cctlds-en Noone can arbitrarily add new ccTLD in the root the mandate of ICANN is to follow the ISO list of countries (besides some exceptions, like .UK and .EU). So, besides creating a new country and gain recognition by UN, you will not get a ccTLD. And `.WS` is indeed a ccTLD even if marketed differently. – Patrick Mevzek Jul 22 '18 at 02:34
You can actually set up your own server and host whatever you like. There are already several organizations that run alternative DNS roots with their own root nameservers and custom TLDs. These include Emercoin, ORSN, and OpenNIC.
However, this practice is actually a very debated issue between proponents and the Internet Architecture Board.
Aside from that, one of the very first issues you'll encounter is accessibily. Like the other posters have said, most of the people who'll be able to connect to your version of the 'Internet' are those in your local network.
Like most alternate DNS TLDs, people would have to configure their DNS resolution settings in order to connect and this feature isn't offered by many ISPs.
So yes, there's nothing really stopping you but take note that functionality will be very limited.

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http://opennic.org reference is way too understated in other comments and even here! it's by far the best working instance i could find of a practical answer to the question. – cregox Dec 22 '20 at 12:47
You can create your own, but unless it is a registered TLD, no DNS hosts will be able to route web requests to you. If you have lots of money, $185,000 you could have some luck ;)

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I'm pretty sure it's because of the long process, maybe tons of paperwork and the voting that ICANN does.
This has been asked before though: How to create own domain extension?
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Yeah i have read that question but I was just curious on the physical limitations stopping say google saying "well screw you ICANN we can do what we like" - great answers though! – Warren Day May 10 '13 at 14:02
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1The high price covers costs of hiring subject experts to review applications. – The Muffin Man May 16 '17 at 23:43
To make a TLD universally accessible requires that it be entered into the "root zone", management of which is handled by ICANN / IANA currently under contract to the US NTIA (part of the Department of Commerce).
There was a process to apply for new TLDs, started back around 2012 or so, but it's very expensive, takes a long time, and that round of applications is closed. It results in over a thousand new TLDs getting added to the root zone. There may be further application rounds in the future.
Within your own network, you can do whatever you like, but be aware that if you pick a common string there is every chance that it might clash with an existing or future real TLD.
Just don't do it - use a real domain name that you own instead.

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Important point for the past round and most probably the next ones: the application is only open to non-individual, aka moral entities. For good or bad reasons, anyone can judge, but those are the rules. There was one counter example in previous round, just because the name of the company was in fact the personal name of its founder. Which also illustrate how to go around that rule :-) – Patrick Mevzek Sep 16 '21 at 23:31
You can! But you need permission from ICANN to use the ROOT servers. But its possible, for example, Google owns the .gle TLD you see it in their domain goo.gle. .biz and others are also private domain names. I would assume this option would be costly though.
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"But you need permission from ICANN to use the ROOT servers." No. DNS root servers are public and everyone can query them. `gle` is just one of the "new" gTLDs. And I do not know what you mean by ".biz and others are also private domain names". `biz` is a gTLD and open to everyone to register domain in it. – Patrick Mevzek Sep 16 '21 at 23:29
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@TiagoRangeldeSousa You can start reading about the last expansion round from the content at https://newgtlds.icann.org/en/about/program – Patrick Mevzek Sep 16 '21 at 23:30